If you want to understand why a public health insurance option is such a bad idea, just imagine a world where we’ve passed the Coburn Amendment, requiring all members of Congress to subscribe to that public option. In that world, a powerful Senator who develops a hankering for a nose job can make a few phone calls and nudge the public insurance commissioner toward a new appreciation for the moral imperative of covering cosmetic surgery.
And if the Senator is successful, where do the funds come from? Either higher premiums, paid for mostly by subscribers who never wanted this kind of coverage, or by dipping into general revenues. After all, the funds have to come from somewhere.
With or without the Coburn Amendment, and however unlikely you might find this particular scenario, the public option is nakedly vulnerable to exactly this type of corruption. A Senator who would never dream of intervening quite so blatantly on his own behalf might think nothing of intervening on behalf of a big campaign contributor, and will certainly think nothing of intervening on behalf of politically potent interest groups—that, after all, is what politicians do for a living.
Don’t believe me? Look what happened with General Motors. As Greg Mankiw pointed out last month, the takeover started with this promise from the President:
GM will be run by a private board of directors and management team…They — and not the government — will call the shots and make the decisions about how to turn this company around.
Within one month, powerful lawmakers had successfully “encouraged” General Motors to retool factories in their home states, and Senator Jay Rockefeller had prevented the closing of a dealership owned by one of his wealthy constituents.
Or recall what happened with Fannie Mae and Freddie Mac, who succumbed to so many political pressure that—well, you already know the rest of that story.
When you politicize an industry, be it cars, mortgage lending or health insurance, you invite interventions on behalf of the rich and powerful. The less rich and the less powerful foot the bill.
PS. Before you tell me that members of Congress are already covered by a public health plan, reflect on the difference between giving them the power to reshape a public health plan that covers 535 people on the one hand, and a health plan that covers tens of millions on the other.
PPS. See also my earlier post on this subject.
I live in the UK. Certain procedures are available free on the NHS, like sex change operations, breast enlargement and fertility treatment which many people consider unnecessary. Labioplasty (reshaping of the vaginal lips) has been in the news recently as available on the NHS. Some of these cost thousands of pounds per patient, use highly skilled staff and expensive equipment. I’ve no idea what idiot allowed this, and would rather elective surgery not be provided except in the most vital cases.
However, I disagree strongly with the implications of your post. Firstly, you never explain why you think politicians are less trustworthy than the current keyholders of American healthcare – insurers. At least politicians are elected and are somewhat accountable.
You warn your readers that politicians could add unnecessary surgeries to the public health service which would increase premiums. What about private insurers who fail to cover necessary surgery? Surely that is worse. Both cases are poor value for money but at least the politician is not under-providing and killing people.
Yes, politicians are corrupt. But they are held to a higher standard than private individuals. They do have to fear scandal. Health Insurer CEOs only have to fear the law. With the automotive industry we probably don’t care too much about scandal, as long as we still have cars and jobs then the ethics are important but secondary. Healthcare is different – people die.
I suppose you always have to weigh the possibility of corruption or moral hazard against a proposed benefit– but this possibility is hardly news, the current system is broken and expensive, and the proposed benefit is an important one and looks necessary (at least to me). Do you disagree?
So, how do you propose to cover the uninsured and those the insurers deem ‘uninsurable’? And in a way that no politician will be able to get their fingers in the pot? And, while you’re at it, how do you get politicians generally to behave themselves and stop interfering?
And… um, is political interference always a bad thing? Leaving medical decisions mostly in the hands of commercial insurers works for most people most of the time, but when it fails, there’s a problem.
I’m looking now at the earlier discussion, where a lot of this is hashed over (and over).
“Firstly, you never explain why you think politicians are less trustworthy than the current keyholders of American healthcare – insurers. At least politicians are elected and are somewhat accountable.”
What you need to consider is that there are TWO big dangers when it comes to health insurance: paying out too much, and paying out too little.
There are lots of good reasons to expect that politicians are mostly only ever held accountable for the latter. Insurers, on the other hand, in a reasonably competitive and transparent market are accountable to both.
The reason people don’t see insurers being held accountable for the latter is that most Americans have their health insurance plans chosen for them by their employers.
If you follow the pattern of the GM situation, then government will eventually have some control of the health care system itself – not just the insurance. At that point, the government could not only deny insurance coverage, it could deny procedures outright.
At least with the current situation, an insurer may choose to not pay for a procedure, but they cannot deny the procedure outright.
Drew: Politicians are held accountable if they pay out too much; if they run out of money or raise taxes too much people will vote them out.
The UK NHS provides healthcare to anyone who needs it. Insurers don’t do this, therefor it’s market failure in my opinion. Maybe that’s not the standard definition, but if you’re relying on the free market to provide healthcare and some sick people are not provided for, then the market has failed.
Also the danger from paying out too much is much less than of paying too little. There’s a limit to how much healthcare a person can consume.
Felix writes:
Politicians are held accountable if they pay out too much; if they run out of money or raise taxes too much people will vote them out.
It would be difficult to reconcile this supposition with our experience of Medicare.
Also:
if you’re relying on the free market to provide healthcare and some sick people are not provided for, then the market has failed.
No, actually what’s happened is that the government has prevented a free market from developing, primarily, as Drew notes, by fostering a system in which our employers choose our insurers from us, and also, for example, by preventing us from buying health insurance across state lines. There is, therefore, a lot of government-created monopoly power in the health care system. Now the same people who created that monopoly are telling us that they need more power in order to ameliorate the effects of monopoly.
Two questions:
1. This already happens all the time with private companies, but it’s more likely to stay hidden, so it only becomes a problem if they overreach to an extent that significantly hurts the company financially. As long as they don’t go far too far, they can continue altering the balance for all of us in counterproductive ways and not only do they have the right to, but we generally don’t know it. If an elected official does the same thing, though, we’re much more likely to find out, and they’re accountable to a larger public. So why do you think the latter is *worse* than the former? It seems better.
2. Why has this not caused all of the countries that have public insurance to end up with worse, less cost-effective health insurance than all of the ones that do it privately? Reality looks more like the opposite of that (though not necessarily perfectly so).
Steve:
So if the government had allowed a best possible free market to develop, insurers would never deny the claims of legitimately sick people? I can’t see that happening. And how do you deal with pre-existing conditions? There’s never going to be enough competition that insurers start paying up for that. Whereas the NHS never turns away a sick person.
Not being allowed to buy across state lines does seem appalling protectionism, what are the reasons for that?
Jeff writes:
“At least with the current situation, an insurer may choose to not pay for a procedure, but they cannot deny the procedure outright.”
Experimental procedures aren’t paid for. Which creates an incentive to call as many procedures experimental as possible.
Also, if it was done properly the government wouldn’t cover people, you’d be allowed treatment by default. There are murmurs at the moment in the UK that obese people who caused their own illnesses by not eating properly should not be treated for them on the NHS, but that’s the closest we’ve come to excluding anyone.
Prof. Landsburg: A tangential issue raised by one of the comments above:
Do you find that non-economists commonly misunderstand the meaning of “moral hazard,” interpreting it to roughly mean “immoral activity”?
Steve,
I don’t fully grasp your point. Do you believe that it is possible to have a 100% coverage (or at least close to it) without a public health-care plan? And if not, don’t you think that it might be for some people – although I concede that is not exactly in the realm of economics – morally important to be so that everyone in their country has access to medic treatment (without going bankrupt in the process)?
ps: There are countries in Europe – like Germany, where I lived for a time – where the coverage is close to a 100%, with the help of public health care systems, and it seems to work fine. And, of course, Germany’s per capita income is certainly not much bigger than America’s.
I came over here to ask Cos’ second question, essentially:
Many countries manage health care through a public system. In general, those countries have cheaper, better healthcare than we do. Why?
Felix writes:
‘Jeff writes:
“At least with the current situation, an insurer may choose to not pay for a procedure, but they cannot deny the procedure outright.”
Experimental procedures aren’t paid for. Which creates an incentive to call as many procedures experimental as possible.’
I think Jeff’s point needs to be emphasized (at least to my news outlets) more strenuously. An insurer never denies a procedure. They only deny paying for a procedure. You’ve missed this point completely. Experimental procedures aren’t covered by insurance, and few people can afford to pay for expensive treatment out of their own pocket. But that creates a HUGE incentive for the treatment providers to legitimize the procedure. Even if there isn’t enough data to support it.
Let’s remember how for-profit insurance works for a minute. A group of people (the insured) get together and all pay into a pot of money. In exchange, they are assured that if they need procedures X, Y, or Z, (which cost $x, $y, and $z respectively) then they will get those procedures provided at zero marginal cost. The ‘pot’ (the insurer) has some fancy (or simple, depending on your level of omniscience) calculations to do, and decides how much money each of the insured needs to put into the pot on a daily basis to cover the cost of the required procedures that come up at random on yearly basis. I.e. multiply (the risk of needing procedure P in one year) * (# of people in group) * (cost, $p) to get the total needed, then divide that over all of the people in the group. The division doesn’t have to be even, but if you have no reason to suspect that one person is higher risk than another, then even division seems fair enough, and even makes the math easier! Now sum that over the procedures p={x, y, z} and you have your premiums. (For profit, add a bit, but not so much that anyone would walk away from the deal, any way you can. Even better for you if you can get ‘discriminatory pricing!’)
You might object to this characterization because the insured would really rather join to get coverage for ‘conditions’ (getting sick) rather than for ‘procedures’ (getting well by prescribed methods), but I laid it out this way to emphasize a point.
The point is that it is really unfair to the insurance companies to have them set the prices *first* then pass laws which mandate which new procedures (especially expensive ones) they must now pay for. Unsurprisingly, premiums will rise to cover the new procedures. So it is pretty hypocritical to complain that insurance rates are rising!
In a free market, I’d expect (being a layperson) a variety of insurance plans, to cater to different people’s taste in medicine. Some plans might be very detailed about which procedures are covered, and some might included as yet to be discovered, ‘experimental’ treatments. You’d expect some price variation, just like different varieties of tomatoes at the grocery store.
Felix, you complain about ‘experimental treatments’ being excluded. But the way I laid it out, the experimental treatments were excluded by the insured, not the insurer, when they picked their insurance plan. Now they cry crocodile tears that their insurance company is evil and wants them to die. I don’t buy it. They should have bought better insurance. Too expensive for them? Why is it any different for the insurance company? It might just be too expensive for them, as well. Or perhaps their employer chose the insurance plans available, and left this one out as too expensive.
Now, I support the idea of the government providing for medical treatment (I’ve experienced some of the UK’s medical treatment, and it was great). But I support for the reasons I support public education. Just think: we provide (in the US) a basic level of education. I think this ‘pays for itself’ because giving the gift of education to millions of children provides them with opportunities to get higher paying jobs later in life. Which the government then taxes. I think saving lives through medicine can be thought of in exactly this same way. Some other public infrastructure, like roads, railways, fire and police protection, etc provide other workable mental models for understanding this.
There is a huge caveat! I am aware that road quality varies greatly from neighborhood to neighborhood. Ditto schools (!). I am aware that people pave their own driveways, and pay for extra schooling (either tutoring during elementary/secondary school or university level). By supporting a basic level of ‘universal coverage’ I’d expect analogous things to happen in medicine. I’m ok with that, yet I’m unsurprised if other, reasonable, people disagree with me.
But I don’t see reasonable arguments being made for or against changes to the medical system made very often. Complaining about the incentive for insurance companies to limit coverage expansion is not (in my opinion) a reasonable objection.
” And how do you deal with pre-existing conditions?”- Felix
If I got into an car accident today and didn’t have car insurance, would you back legislation forcing auto-insurers to sell me insurance tomorrow to cover the accident I had today? Of course not because it’s absurd and would bankrupt insurance companies or force ridiculously high premiums.
Also, all the problems you point out will GET WORSE under government controlled medical insurance. Of course there are problems associated with privately provided insurance plans. Some people are just schmucks and think nothing of stealing money from their customers. The problem with the government is schmucks are protected by a labrynth of byzantine red tape.
At least with insurance companies there is always fraud court and insurance companies are not popular. This threat protects consumers better than any regulator ever could and politicians generally insulate themselves from legal actions.
And you are wrong that we can just vote politicians out of office. The democrats and republicans and their lawyers, in collusion with incumbent politicians, have made it all but illegal to run any sort of political opponent against incumbents in elections. Every elections cycle there are dozens, if not hundreds, of news stories taht I read about where legal action is taken against a political upstart because they failed to fill out form 2d from regulation 301(1)(c) (<- made up by the way for effect) or filled out the paperwork improperly.
Prof. L,
Your argument against a public health insurance option that requires congressmen to subscribe is that it would some how give them greater influence on the coverage or other aspects of its workings. And then your second formulation includes any public option for the same reason; special interests, through legislators, would have greater control over the care provided.
Are you suggesting that an influential congressman who subscribes to BCBS is powerless to call them up and make suggestions? Healthcare insurance is presently one of the most regulated industries around.
But even if the congressman did drive up the coverage and the price of the public option, how does that keep people from moving to a policy offered by a competing private company?
Imagine if all roads were privately owned. Could interstate transit function effectively without a government regulation of maximum speeds, unified signal types, bridge and tunnel quality standards, etc.?
And if there was an isolated town that no private company thought important enough to build a road to, wouldn’t the public sector have an obligation to fill in the gap left by the private road industry?
A belated response to Cos and Sierra, who asked how my story gibes with the experience of other countries.
Three responses:
First, I am not well educated about the details of government run health insurance programs in other countries. It would be better if I were, but I’m not.
Second: We are trying to predict how a public option would play out under the American political system. There are two kinds of experience that might be relevant to that question: How have public insurance programs played out in other countries, and how have public programs other than insurance played out in the United States? As I said, I have no detailed knowledge of the first, but I have plenty of detailed knowledge of the second, and I suspect that it’s the second that’s more relevant. Our system invites politicians to intervene on behalf of vocal well-organized interest groups and pass on the bills to other people, usually to people who are less well off. This is something I think I *do* know something about, and there gazillions of examples, of which General Motors (see the paragraph about this in the original post) is just one recent example.
Third, it would be rash to assume that other countries provide health care more cheaply than we do just because that’s how it looks on the books. A lot of expenses might be being passed off to taxpayers in ways that are very far from transparent. That, in fact, is what I’d expect to be the case—but again, I have no numbers at my fingertips.
Some further belated responses:
To Felix:
So if the government had allowed a best possible free market to develop, insurers would never deny the claims of legitimately sick people?
Of course not. Mistakes will be made in both directions all the time. The question is not “which system is mistake-free?” or “which system makes all its mistakes in one direction only?”; the question is “which system minimizes the the total cost of all mistakes in both directions?”.
To RL:
Yes, the commenter did misuse the phrase “moral hazard” but no harm was done because it was clear what he meant. To other readers: “Moral hazard” refers specifically to the act of behaving more recklessly because you’ve got insurance; it does not refer to other forms of socially unproductive behavior, and it need not carry the implication of “immoral”.
For the record, I know what ‘moral hazard’ means. Looking back at my comment I can see that combining ‘moral hazard’ with ‘corruption’ as things policymakers should take into consideration would lead someone to think otherwise. But I actually meant to make contrast between the two, not to put them in the same moral basket.
Matt: Sorry to have misread you.